Interest Rate Ceiling

Written By
Paul Tracy
Updated July 30, 2021

What is an Interest Rate Ceiling?

The term interest rate ceiling typically refers to the maximum lifetime interest rate charged on an adjustable rate mortgage according to the terms of a mortgage contract.

How Does an Interest Rate Ceiling Work?

A potential homebuyer contracts with a mortgage lender to secure a loan. If it is an adjustable rate mortgage, the mortgage contract spells out the details which normally include the maximum interest rate charged. This will include the maximum annual rate as well as the lifetime (cap) maximum. The rate can never go beyond either one of these two ceilings.

For example, a homebuyer takes out a mortgage with an annual increase cap of 2% and a lifetime interest rate ceiling or cap of 10%. This means that if the prevailing interest rate goes up every year after he initially takes out the mortgage, his rate will never increase more than the agreed upon 2% annually or go beyond the 10% rate over the life of the mortgage.

[If you're ready to buy a home, use our Mortgage Calculator to see what your monthly principal and interest payment will be.]

Why Does an Interest Rate Ceiling Matter?

Having an interest rate ceiling is preferable when the rates are expected to decrease during the life of the mortgage, or, if the homeowner will not be living in the home for the long term. The downside would be if one tries to refinance the mortgage if the market starts dropping and the homeowner is still paying a higher percentage.

Activate your free account to unlock our most valuable savings and money-making tips
  • 100% FREE
  • Exclusive money-making tips before we post them to the live site
  • Weekly insights and analysis from our financial experts
  • Free Report - 25 Ways to Save Hundreds on Your Monthly Expenses
  • Free Report - Eliminate Credit Card Debt with these 10 Simple Tricks
Ask an Expert
All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Interest Rate Ceiling.
Be the first to ask a question

If you have a question about Interest Rate Ceiling, then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

If you have a question about Interest Rate Ceiling, then please ask Paul.

Ask a question Read more from Paul
Paul Tracy - profile
Ask an Expert about Interest Rate Ceiling

By submitting this form you agree with our Privacy Policy

Don't Know a Financial Term?
Search our library of 4,000+ terms